Student Loans - Easy, right?

I realized
after meeting with many, many families that the concept of student loans is a
bit confusing. Well actually, unless you are a Financial Aid Administrator,
understanding student loans can be very difficult. So, I thought it would be
helpful to clarify a few things about student loans…First, there are two types
of student loans: Federal and non-Federal (also known as private or
alternative student loans).

Federal
student loans are made available to students by the federal government. Schools
have the option of receiving federal loans directly from the federal government
(Direct Loans), or receiving federal loans from a lender (chosen by the borrower).
In this case, the lenders are guaranteed the funds by the federal government (FFEL
Loans). In essence, FFEL and Direct are identical loan programs with a
different delivery method. RIT is a Direct Lending school; therefore, any
federal student loan included in a financial aid award offer is processed by
RIT. Borrowers do not have to find a lender for these loans.

These
federal loans are made available to students without a co-signer or without a
credit history. And, the interest rate is fixed at either 5.6% for subsidized
loans (interest free while in college) or 6.8% for unsubsidized loans (interest
accrues while in college). The federal student loans are by far more attractive
than the non-federal loans. However, the government puts caps on the annual amount
a student can borrow from the federal loan program. For example, a first year
dependent student can borrow a maximum of $5,500 (no more than $3,500 subsidized)
from the federal loan program. So, this is when the non-federal loans are considered.

Non-federal
loans are offered by lenders to students, generally with a credit-worthy co-signer.
The maximum amount that can be borrowed is normally the difference between the cost
of attending college and the total financial aid awarded. Unlike the federal loans,
these loans typically have a variable interest rate which is tied to either the
prime or the LIBOR. In most cases, repayment can be deferred until after the student
graduates. However, the interest will never be subsidized.

OK, are you
still with me here?

Another twist
to the student loan program is the Federal Parent
Loan for Undergraduate Students (PLUS). Just like the federal student loan,
there are two delivery options for the PLUS: Direct and FFEL. If a school is direct
lending, all federal loans are processed by the school. There is not the option
of getting the federal loan delivered by a lender. This also works in reverse
for FFEL schools. As the name implies, this is a loan option for a parent of a
dependent student. AND this option is recommended over the non-federal loans to
meet any remaining educational expenses after financial aid has been applied. The
PLUS Loan has a fixed 7.9% interest rate and repayment can be delayed until 6 months
after the student graduates. There is a minimal required credit check for approval.
However, if the loan is credit-denied the student has an option of an additional
unsubsidized loan.

So, in summary
there are primarily 3 loan options to meet educational expenses: